The Snowball of Derivatives: The Specter of a Second Black Swan

Banking sector consolidation  (via acquisition of failed banks) and the generalized bailout of bondholders, actions both promoted by governments, have aggravated the problems of “too big to fail” and  “moral hazard”. Hence incentives for reckless behavior have actually heightened. So far there has been lots of talk within the G-20 and other forums but little […]

A Primer on Civic Banking

From Greedy Banking to Civic Banking

The banking profession is going through rough times. So far the cost of the bail-out worldwide is well on the way to US$ 5 trillion or one–tenth of the Gross World Product. Some analysts put the eventual estimate at the exorbitant figure of US$10 trillion. This would increase by one-fifth the world’s stock of public debt .Taxpayers and future generations will have to shoulder the extra burden .Ordinary folks are angry at the largesse of top banking executives .They pocketed stratospheric paychecks during the boom years. And now governments everywhere are socializing the losses to prevent a systemic collapse. Adding to the public outrage is the fact that banking regulators did little to rein in high leverage ratios , reckless risk- taking , and related self-serving perks .Opinions are still divided as to whether regulators were ignorant , ideological , negligent , “captured” – by the very banks they were expected to regulate – or all of the above.

The Rising Sun in the Coming APEC Summit in Lima

Peru will host, this coming weekend, the annual summit of heads of state of the Asia Pacific Economic Cooperation (APEC[1]), China’s President Hu Jintao included. The APEC  forum  was established in 1989 to  enhance economic growth in the region and to strengthen links between both shores of Pacific .APEC has 21 member countries  which account for approximately 41% of the world’s population ( 2.7 billion  ) ,  55% of world GDP,  and about 49% of world trade. The timing of the summit could not be better for Peru. The reason is that it offers the ideal silver-lining to exhibit, to participating leaders and businessmen, the resilience and strength of Peru’s economy in the midst of the global crisis. The marketing pitch:  Peru as a good place to invest even in bad times.

Peru Set to Be The Fastest Growing Economy of Latin America in 2009

In the late eighties and early nineties   , I traveled often to Peru to analyze the macroeconomic situation of the country. Most Peruvians I interacted with were negative about the prospects of the country .After decades of economic decline and years of rising terrorism, they had very good reasons to be negative .At the time, “a pessimist was indeed a well informed optimist”. The most eloquent expression of Peru’s decadence was Mario Vargas Llosa‘s fatalist quote: “when did Peru get screwed up?” .These were the words of a central character in his 1969 masterpiece “Conversations in the Cathedral.”  The mood has improved markedly since the nineties – along with successful economic reform   – but at any hint of crisis, local or international, pessimism looms again high in the horizon.

Peru Unscathed

In mid October, at the Annual Meetings of the World Bank and IMF, the Minister of Finance of Peru, Luis Valdivieso, announced his intention to float a US$600 million, 30 -year bond   . Will currently dysfunctional capital markets welcome a new bond   from a developing country issuer? The short answer is no , but Peru may be one of the  exceptions .The paradox is that Peru could succeed to tap  capital markets  precisely because it does not   need the money .It has been running  budget surpluses for many years and its  public debt is small .In fact , Peru  is one of the few countries where  central bank’s  international reserves ( at US$35 billion or 26% of GDP ) exceed the total domestic and external public debt ( at US$ 30 billion ) . In other words , Peru’s public sector is a net creditor .Since the proceeds of the bond are not needed to pay for expenditures , the authorities intend to use the money  to buy back Peru’s  short-end  maturity  bonds from  investors  .The operation will extend   the average  maturity of the external  debt ,  now at eleven years .